THE DAY AHEAD: IPO market left to the cash strapped

Larry Dignan
3 min read

Why are so many companies still launching IPOs knowing they will hit a brick wall in the aftermarket? It's simple -- they desperately need the cash.

In this jittery market for IPOs, it's becoming commonplace for companies to cut shares; price ranges and basically beg investors to take them. Then these fledgling companies post slight gains on their first day -- if they are lucky.

IPO Market: Nothing but junk?

In the last two weeks, the focus has been on the clusters of companies postponing initial public offerings. The most recent batch of companies to postpone IPOs include Garden.com, Medscape and OpenSite Technologies. And that's just the beginning of the list.

Although postponing an IPO isn't fun, many of these companies putting off market debuts are fortunate -- they don't HAVE to go public just yet.

Some of the latest market entries don't have the luxury of waiting for good timing because they are going broke, or need the cash to effectively compete with competitors that have already gone public.

So despite a glut of offerings and shabby prospects, these oh-so-desperate-to-be-public companies are forging ahead anyway. The end result is investors will be seeing a bunch of also rans with the occasional strong deal sprinkled in.

The most recent example of this phenomenon is Hotjobs.com (Nasdaq: HOTJ), whose CEO actually told ZDII that he knew the market stunk, but the company needed the cash to compete with companies like Careerbuilder (Nasdaq: CBDR), which went public earlier.

It's not hard to find the other companies that need the dough. Just check out all those revised shares and price ranges.

Underwriters are trying everything they can to bring these financially challenged companies public so they have capital.

NetScout Systems Inc. (Nasdaq: NTCT), a network management software maker, might have benefited from better timing, but forged ahead anyway. On Tuesday, NetScout was offering 4 million shares with an expected price range of $14 to $16. By time it priced the company was offering 3 million shares at $11, the bottom of its lowered price range.

Why not wait? NetScout probably wanted the capital to battle competitors such Concord Communications (Nasdaq: CCRD), Visual Networks (Nasdaq: VNWK) and Network Associates (Nasdaq: NETA). The sad part is that NetScout probably could have held off -- it actually turns a profit and counts Cisco Systems Inc. (Nasdaq: CSCO) as its largest customer. Put simply, NetScout appears to be a real company. But then again profits and first day IPO performance aren't exactly linked.

IXNet (Nasdaq: EXNT) also took the plunge, priced well below its intended price range and fell flat. Luminant Worldwide (Nasdaq: LUMT), an e-commerce consulting firm, also cut its price range Thursday, but needs the cash on any terms. Luminant needs its IPO to battle iXL Enterprises (Nasdaq: IIXL) and other consultants that amassed a cash hoard by going public when consultants were popular a few months ago.

The list goes on. Active Software Inc. (Nasdaq: ASWX) priced in the middle of its range, but cut back the number of shares offered. It trades today.

And next week LookSmart (Nasdaq: LOOK), yet another search engine, will offer a whopping 12 million shares priced in a range of $11 to $13. Look for LookSmart's IPO to be revised.

The timing could be better, but LookSmart has no other choice because it has to compete with About.com Inc. (Nasdaq: BOUT) and GoTo.com Inc. (Nasdaq: GOTO), which raised a nice cash stash in a recent IPO.

Timing is everything in the IPO market -- unless you need the cash.